Coming to terms with the mining boom

If there’s a boom in one part of the economy, says Treasury economist David Gruen, significant restraint needs to be imposed on other parts of the economy or it will overheat.

It’s a simple proposition, but of course it is also an appalling prospect for those caught on the losing side of the two-speed economy. And it’s an agonising choice for political leaders who face intense pressure to sacrifice the national economic interest to save those in distress.

The challenge facing Australia is spelt out in Gruen’s paper, The Macro-economic and Structural Implications of a Once-in-a-Lifetime Boom in the Terms of Trade, presented to the annual conference of the Australian Business Economists annual conference in Sydney last week.

It can be seen in the Treasury’s estimates and forecasts of growth across the so-called patchwork economy.

The main graph below shows the dramatic growth of mining-related construction, services and manufacturing (metal products). These industries together are forecast to grow at an average annual rate of more than 20 per cent over the three years to 2012-13 as the mining investment boom adds to production capacity.

As new projects come into production, and coal and iron ore production rebounds from this year’s natural disasters, the mining sector output growth also is forecast to accelerate to an average rate of 5 per cent, well ahead of the national economy’s growth rate.

But that means the non-mining parts of the economy – the non-resource-related manufacturers and service industries – must grow at well under the national rate. They are relegated to the second role in Gruen’s basic proposition, with the non-mining, non-farm economy growing at an average of just 1 per cent year over the three years.

Of course, there are winners and losers within this group. While employment in healthcare and social assistance has been expanding strongly, retailers, wholesalers and manufacturers are under great pressure.

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First they should recognise it for what it is likely to be. To Gruen, the re-emergence of China and India seems more like a generational change in Australia's comparative advantage than an example of “Dutch disease", in which industry is hollowed out by a passing boom in the mining sector.

This is structural change that we are unlikely to want to reverse, because to do so would be to partially turn our backs on the economic benefits available from fully engaging with the industrial revolution on our doorstep.

Governments should be facilitating, not impeding, the shift of labour and capital to the faster-growing parts of the economy.

Second, they should know that the widening gap between mining and non-mining growth rates so far has not been matched by widening gaps in regional unemployment rates. As the mining boom has progressed, the national average unemployment rate has fallen and so has the dispersion of regional unemployment rates. This obviously is an important qualification to claims by industry for government assistance.

It is, as Gruen says, also an impressive achievement – another, unexpected win for labour market flexibility, which the government should be determined to preserve.

Yet none of that means the government should be blind to the challenge facing industries on the losing end of the structural change under way in the economy.

In advice to Chile, which is going through a similar but less extreme adjustment, the International Monetary Fund argued that manufacturers needed to increase productivity and diversify into higher-value-added products to maintain their competitiveness. It is advice that could be extended to Australian manufacturers.

Not every manufacturer can do it, obviously, but some certainly can by investing in new technology and by innovation in products, production, marketing and management. They can do it, and they will –if they have no choice.

But before they do, a good number will go to Canberra seeking an easier option in the form of government assistance. And, when they do, the politicians must say no. Unfortunately, that is very difficult. The chairman of the Productivity Commission,
Gary Banks
, lamented last week the new willingness of politicians to hand out anti-dumping assistance.

Anti-dumping assistance is nothing more than relabelled import protection, because dumping is just an emotive label for a form of price competition that is commonly practised by our own exporters. The main effect of anti-dumping assistance is to increase the costs of industries and households that consume the goods of the protected industry. Jobs and profits are protected in one industry at the cost of jobs and profits in industries made less competitive by the higher cost of inputs.

If anti-dumping assistance serves any worthwhile purpose, it is as a safety valve that allows politicians to avoid more permanent forms of protection. But it must be carefully designed so as to limit the damage to the economy.

Sadly, the Gillard government did not take all the commission’s advice when it modified the anti-dumping regime at the behest of industry and the manufacturing unions. And the opposition has gone one worse.
Tony Abbott
has promised to reverse the onus of proof, so that international suppliers would have to show they were not dumping.

If the measures the Opposition Leader is proposing were made widely available, they could become a highly insidious impediment to competition in the Australian economy. In the meantime, as Banks says, Abbott has made it harder for the government to hold the line against the demands of those who want more effective protection against foreign competition.

That is exactly what politicians should not be doing.

If the government wants to do something more to help manufacturing it should boost immigration. Manufacturing is being squeezed by expansion of the highly capital-intensive mining sector. An increase in the size of the working-age population would make it easier for the more labour-intensive manufacturing sector to hold its ground.